Stocktake: Doing business in China is getting tougher

Nike, H&M and Adidas among those whose shares fell after voicing forced labour concerns

Adidas and H&M stores in a shopping area of Sanlitun, in Beijing. Companies want to please environmental, social and governance investors without offending China. Photograph: Roman Pilipey/EPA

Adidas and H&M stores in a shopping area of Sanlitun, in Beijing. Companies want to please environmental, social and governance investors without offending China. Photograph: Roman Pilipey/EPA

 

Global corporations have increasingly taken the view in recent years that the rewards of social activism outweigh the risks, taking stances on issues such as racial justice, LGBT rights, climate change and labour practices. Now they’ve run into a problem – China. Shares in companies like Nike, H&M and Adidas all tumbled recently after China criticised them (and a host of other Western brands) for having expressed concerns about forced labour in the cotton industry in Xinjiang. Multiple Chinese celebrities and online influencers severed ties with various Western brands, while H&M products were removed from major ecommerce platforms including Alibaba and JD.com. Displeasing China is fraught with commercial risk. China is H&M’s fourth-biggest market.

The US remains Nike’s biggest market, although China is the firm’s fastest-growing market. Accordingly, some companies have already changed tack. The Chinese arms of Hugo Boss and sportswear brand Fila issued supportive statements on Chinese social media regarding Xinjiang cotton. Zara owner Inditex has removed its original statement on forced labour from its website; so has PVH (which owns Calvin Klein and Tommy Hilfiger) and VF (North Face, Vans). On the other hand, horrendous reports coming from Xinjiang mean kowtowing to the Chinese Communist Party won’t please many Western consumers or the increasingly influential ESG (environmental, social and governance) fund industry. Evidence increasingly suggests poor ESG practices hurt stock prices. Indeed, ESG risks are bad for CEOs, notes investment blogger Joachim Klement, who points to a recent study suggesting the odds of a CEO being fired “explodes” if it gets an extreme reading from RepRisk, a firm which measures companies’ reputational risk. Companies would love to please ESG investors without offending an increasingly confident, confrontational China. That balancing act is growing ever more difficult.

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